UPDATE 2-BOJ unfazed by yield surge, bond sell-off eases slightly

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TOKYO, Oct 5 (Reuters) - The Bank of Japan on Friday kept the size of its buying in superlong government bonds even after their yields spiked to 2-1/2-year highs, reinforcing a recent commitment to allow wider yield moves aimed at tempering distortions caused by its ultra-loose policy.

The central bank’s new flexible policy framework, adopted in late July, appeared to address widespread criticism that its massive asset-purchase program was suffocating the bond market.

The price of Japanese government bond futures hardly budged following the BOJ’s latest widely-anticipated announcement. The December JGB futures ended up 0.13 point at 150.09.

The benchmark 10-year JGB yield dipped 0.5 basis point to 0.150 percent, off a 2-1/2-year high of 0.155 percent hit on Thursday, following a surge in U.S. bond yields on rising U.S. inflation expectations.

Many market players expect the BOJ to avoid trying to keep a tab on rising yields until the 10-year JGB yield nears 0.200 percent.

Governor Haruhiko Kuroda has indicated the central bank would tolerate the 10-year JGB yield to move up to 0.2 percent away from its policy target of zero percent, compared to 0.1 percent previously.

The 20-year JGB yield edged down 1.5 basis point at 0.675 percent, off 1-1/2-year high of 0.690 percent touched on Thursday.

Many market players expect the BOJ to continue to trim buying in JGBs gradually, especially in the longer end of the curve, as its snowballing JGB holdings is causing a shortage of bonds market players can buy and trade.

The BOJ currently owns about 45 percent of JGBs, a situation that has depressed yields beyond normal market conditions and smothered two-way trades.

The BOJ’s purchase of JGBs dropped to 6.8 trillion yen last month, the lowest level in almost four years.

Source said the central bank is seen tolerating further rises in super-long yields as long as the increase does not push 10-year yields well above its zero percent target. (Reporting by Hideyuki Sano Editing by Shri Navaratnam)